Once high-flying start-ups that serve online creators and influencers have been forced into a painful retrenchment, laying off staff and abandoning fundraising plans in response to the downturn in the tech sector.
Membership platform Patreon and newsletter service Substack are among those which secured large valuations thanks to their position at the vanguard of a global trend that involved artists, celebrities and writers seeking to build, and profit from, direct relationships with fans.
Andreessen Horowitz, one of Silicon Valley’s top venture capital investors, dubbed these businesses part of the “passion economy”, providing services, products and infrastructure that allow creatives to cash in on their huge online followings.
Investment in the sector rose from $1.4bn in 2020 to $3.3bn in 2021, according to data provider Dealroom. But this fell 75 per cent in 2022 to $801mn, the figures show, as investors became increasingly nervous about frothy valuations in private tech companies.
Patreon, which secured a $4bn valuation in 2021, told the Financial Times it was abandoning plans to introduce cryptocurrency payments and had delayed previous ambitions of an initial public offering.
“Obviously the broader economic environment has changed drastically,” said Julian Gutman, chief product officer at Patreon. “We’re not immune from that so we have to change things about how we operate.”
Substack, the much-hyped newsletter service valued at $650mn in March 2021, told the FT it had given up on near-term plans to raise further capital to support the business.
“Our plan to grow Substack no longer has raising money as a necessary component along the way,” said chief executive Chris Best. “We’re going to have a plan where we use the revenue from the growing business to fund investments we need along the way.”
Other tech groups have been forced to respond to a funding crunch and economic downturn to refocus on achieving stable revenues, rather than further spending to achieve more rapid growth.
Twitch, the Amazon-owned video gaming streaming service, has announced plans to take a larger cut from subscription payments for some of its biggest streamers next year. OnlyFans, known for hosting adult content created by users, added shopping features to diversify creators’ income streams in November.
These moves by passion economy companies represent a resetting of expectations for a once-hyped sector. In April 2021, Tiger Global led a $155mn funding round for San Francisco-based Patreon that valued the business at $4bn, up from $1.2bn in a previous round just six months before.
Founded in 2013 by once struggling musician Jack Conte and developer Sam Yam, the platform takes between a 5 and 12 per cent cut from direct payments made by fans to creators.
The company “was swimming in money and people were begging to invest more,” according to one former senior staffer at Patreon, who added it “dictated the timeline and the terms. Investors were told ‘if you want to invest, apply here’. That’s not something I’d seen before.”
But six or seven-figure deals to encourage TikTok stars such as influencer Larray to set up Patreon accounts offering exclusive content failed to bring in as much revenue as expected, former staffers said.
Pivoting from the strategy, the company laid off almost half of its 18-strong creator partnerships team, responsible for signing and managing online influencers, as part of broader cuts of 17 per cent of its workforce in September.
“They have a brand that they’re for struggling artists,” said one former Patreon staffer. “They wanted to change that perspective by going after the biggest creators in the creative economy. The reality is that didn’t really work.”
Substack also faced a difficult 2022, abandoning a fundraising round in May, cutting 14 per cent of its 100-person staff in June, and contending with high-profile journalists and publishers — such as political newsletter Dispatch and academic Grace Lavery — leaving the site.
Still, the company continues to attract interest. Twitter’s owner Elon Musk tweeted in December that he was “open to the idea” of buying it after Twitter decided to shut down its own newsletter service Revue.
Substack said a Musk acquisition was “not something we’re thinking about at the moment. We’re 100 per cent focused on building Substack.”
Passion economy businesses also face a broader threat this year: falling consumer spending. A third of people who use a paid-for media subscription, including for payments to creators, plan to cut back in the next six months, according to market research company Mintel.
Services such as Netflix offer viewers access to a broad range of content for as little as £7 per month. By contrast, Patreon, Substack or OnlyFans subscribers can pay just as much for access to a single creator’s content.
“People are making choices,” said Rebecca McGrath, an internet analyst at Mintel. “Unless you’re very loyal to a creator, that’ll be one of the obvious things to drop”.